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House Passes Repeal of 3% Withholding on Government Contracts

The House of Representatives passed a bill Wednesday to repeal a law
that beginning in 2013 requires tax withholding of 3% of payments to
vendors and contractors providing services to federal, state and local
governments and their agencies. The bill, HR
674, passed by a vote of 405-16 and now goes to the Senate for consideration.

The bill would remove Sec. 3402(t), which Congress enacted as part
of the Tax Increase Prevention and Reconciliation Act of 2005, P.L.
109-222. Sec. 3402(t) requires the withholding from payments by the
federal or state governments or their instrumentalities or
subdivisions (including multistate agencies) to any person for
services or property.

As part of the Government Withholding Relief Coalition, a
100-plus-member coalition of local governments, industrial and
professional associations, and interest groups, the AICPA has been
among advocates for repeal of the law.

In letters to Congress earlier
this year and again
this week, Patricia Thompson, chair of the AICPA’s Tax Executive
Committee, requested repeal of the withholding provision, calling it
an undue burden for both governments and contractors and unnecessary
given existing tools that already monitor contractors’ federal tax
compliance. Thompson said farmers who receive payments from the U.S.
Department of Agriculture and fishermen will be adversely affected, as
well as doctors and other medical professionals who accept Medicare
payments. Also, even with the extensions of its effective date
intended to allow governments to reprogram their payment systems,
those governments are still forced to spend limited funds to do so,
Thompson wrote.

“Moreover, in the absence of repeal, the withholding law will likely
have a pronounced (but negative) impact on government contractors with
low profit margins, potentially threatening their operations due to a
tightening of cash flow,” she wrote in an Oct. 25, 2011, letter to
members of the House of Representatives urging passage of HR 674.

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.